Markets May Gather Pace On Better Earnings

Stock markets are sanguine as the earnings season starting this week is expected to build on last quarter’s hope recovery. This quarter is not expected to be earth-shattering, but the pace of revenue growth will be the most watched number. Anything nearing the double digit mark signals a sustainable turnaround in India Inc – a key marker to market fortunes.

The two critical components of any stock market rise is a regular inflow of cash and a pick-up in earnings. Both are now showing signs of continuity. Cash inflows from foreign investors, thanks to the negative interest rates in Europe, are getting topped up. Not to be left behind, domestic investors are piling in money into mid- and small-caps and equity mutual funds.

Globally, negative interest rates in Europe are expected to keep global stocks buoyant. Investors are rushing to sovereign debt in record numbers, which show that $13 trillion of funds are into bond funds driving yields of a few countries in the negative territory.

The US Fed, too, is expected to keep its policy a bit loose in the wake of all the global happenings. And this is seeing investors continue to pile into sovereign debt in record numbers because of lower global growth avenues. For the moment, this exuberance is expected to continue. Low interest rates across the globe will fuel the fires of the equity market. And that means that the ‘carry-trade’ that distributes cash across the globe will continue for now.

But watch out for when this turns ‘irrational.’ Over the long haul, if these negative interest rates start to normalise, then equity investors will have to start worrying.

Meanwhile, India is recovering and global investors are looking at the growth possibilities of the Indian economy with a stable currency. A small recovery in revenue and earnings this season can make the lofty valuations of the equity markets look inexpensive in comparison. At the moment, the Sensex is closer to a PE of 20.

The base i.e. earnings is expected to tick up as PSU banks are expected to post better numbers after the rigorous clean-up last year. Besides, a recovery in commodity prices is setting up for a core sector recovery. And a growing consumption sector is seeing better capacity utilisations in India Inc.

Revenues are expected to grow at 8-9 per cent. Hence, expect profits to grow in the mid-teens.

A deleveraging cycle is underway that is expected to make Indian corporate balance sheets stronger. Corporate capacity utilisations are around 70 per cent and a strong consumption led growth could see this go higher, driving higher profitability for Indian companies. Hence, this season one can expect to see many positive earnings surprises.
To top it, cash in the economy is increasingly being channelled into the capital markets. New IPOs are seeing record subscriptions. Domestic equity funds are garnering inflows to the tune of Rs 2,000 crore every month through SIPs over the bulk investing by HNIs. Average AUMs have soared past Rs 14 lakh crore mark to a new record.

Investors could continue to stick to a basic plan of buying the dips and of looking at companies that are expected to see good growth such as autos, consumption, financials, chemicals, cement, and select infrastructure counters.

Stay with stocks that are seeing an improvement in capacity utilisations – as a result these companies can derive a multiplier effect on earnings growth. A small improvement in revenues of cement, engineering, chemicals and other sectors could see profits improve at a faster pace. And that is what the markets will start to pay a premium for.